BRIEF FOR RESPONDENT REGULATORY COMMISSION

USCA Case #13-1229 Document #1468400 Filed: 1210212013 of 58

[NOT YET SCHEDULED FOR ORAL ARGUMENTJ

No. 13-1229

IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OFCOLUMBIA CIRCUIT

UNITED STATES POSTAL SERVICE,

Petitioner,

v.

POSTAL REGULATORY COMMISSION,

Respondent,

and

GAMEFLY, INC.,

Intervenor.

BRIEF FOR RESPONDENT POSTAL REGULATORY COMMISSION

OfCounsel:

STEPHEN L. SHARFMANGeneral Counsel

R. BRIAN CORCORANDeputy General Counsel

RICHARD A. OLIVERALLISON JW. McDONALD

AttorneysPostal Regulatory CommissionWashington, DC 20268

STUART F. DELERYAssistant Attorney General

MICHAEL S. RAAB(202) 514-4053

JEFFREY CLAIR(202) 514-4028

[email protected]

Attorneys, Civil DivisionRoom 7243, Department of Justice950 Pennsylvania Ave., N.W.

Washington, D.C. 20530


CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

A. Parties and Amici.

All parties and amici appearing in this Court and before the Postal

Regulatory Commission are listed in the Brieffor the Petitioner.

B. RulinQs under Review.

References to the ruling at issue appear in the Brieffor the Petitioner.

C. Related Cases.

This is an appeal from an administrative decision issued on remand from the

Court in GameFly, Inc. v. Postal Regulatory Comm 'n , 704 F.3d 145 (D.C. Cir.

2013).

/s/ Jeffrey ClairRoom 7243, Civil DivisionDepartment of Justice950 Pennsylvania Ave., NWWashington, D.C. [email protected](202) 514-4028

1


TABLE OF CONTENTS

CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES .i

GLOSSARY Vlll

STATEMENT OF JURISDICTION .. .................................... 1

STATEMENT OF THE ISSUE PRESENTEDFOR REVIEW 3

STATEMENT .4

A.

B.

c.

D.

Nature of the Case and Course of ProceedingsBelow .4

Statutory Background 5

1. The Postal Reorganization Act of 1970 5

2. The Postal Accountability andEnhancement Act of2006 7

Statement of Facts: GameFly's DiscriminationComplaint... 8

Prior Administrative and Judicial Decisions 11

1. Commission's Initial AdministrativeDecision 11

E.

2. The Court's Prior Decision in GameFly I 12

Commission's Decision on Remand 13

SUMMARY OF THE ARGUMENT 19

II


ARGUMENT.......................... 23

I. The COnmllssion's Remedy Is Consistent WithThe Statute As Well As The Court's Mandate inGameFly I 23

II.

m

The Commission Reasonably RejectedOperational Remedies _ _ _ 28

A. The Commission Reasonably DetenninedThat Operational Remedies That Do NotEntail The Prescription Of Specific,Measurable Perfonnance StandardsFor Manual Processing OfDVD Mail WillNot Adequately Prevent ContinuedDiscrimination Among DVD Mailers 29

B. The Commission Reasonably DetenninedThat Operational Remedies MandatingSpecific Levels Of Manual ProcessingWere Unenforceable And Apt ToUnreasonably Delay RelieL 33

The Commission's Rate-Based Remedy IsReasonable .37

A. The Postal Service Waived Its ObjectionsTo The Adequacy of Supporting Price andCost Infonnation, And The Record, In AnyEvent, Supports The Commission'sDetennination .... .. .... 37

III


B. The Commission Reasonably DeterminedThat Its Mandate To Remedy DiscriminationTakes Precedence Over Other CriteriaGoverning Regulation of Market-DominantProducts .43

The Prescribed Rate Adjustments AreConsistent With The Statute AndNondiscriminatory .. . .45

CONCLUSION .48

FRAP 32(a)(7) CERTIFICATE OF COMPLIANCE ..

CERTIFICATE OF SERVICE .

TABLE OF AUTHORITIES

Cases:

Air Transport Ass'n ofAmerica, Inc. v. u.s. Dept. ofTransportation, 613 F.3d 206 (D.C. Cir. 2010) 32

Associated Gas Distriblllors v. FERC, 824 F.2d 981(D.C. Cir. 1987)..H.H....H...32

AT&T Wireless Serv., Inc. v. FCC, 365 F.3d 1095(D.C. Cir. 2004) H.. H H.. H 25

Bennett v. Spear, 520 U.S. 154 (1997) 3

Bowman Transp. Inc. v. Arkansas-Best Freight System,419 US. 281 (1974) H 34

*Authorities chiefly relied upon are marked with an asterisk.

IV


* Butz v. Glover Livestock Comm'n Co., Inc.,411 US. 182 (1946) 22-23,28

City a/Cleveland v. Federal Power Comm'n,561 F.2d 344 (D.C. CiL 1977).. 25

Columbia Gas Transmission Corp. v. FERC,750 F.2d 105 (D.C. CiL 1984) 29

Consumer Federation ofAmerica v. Consumer ProductSafety Comm'n, 990 F.2d 1298 (D.C. CiL 1993) 28,29

GameFiy, Inc. v. Postal Regulatory Comm'n,704 F.3d 145 (D.C. CiL 2013) 2, 5, 12, 16, 19,21,

... 22,23,24,26,27,32,37,42,,43,44

• Heckler v. Chaney, 470 U.S. 821 (1985) 28

Illinois Public Ass'n v. FCC, 117 F.3d 555 (D.C. CiL 1997) 32

Marcum v. Salazar, 694 F.3d 123 (D.c. Cir. 2012) 3

Nat. Ass'n a/Greeting Card Publishers v. USPS"462 U.S 810 (1983).................................... .....6

Niagara Mohawk Power Corp. v. FPC, 379 F.2d 153(D.C.CiLI967) 28

Stilwell v. Office a/Thrift Supervision, 569 F.3d 514(DC. CiL 2009)................. 32

Towns a/Concord, Norwood, & Wellesley, Mass. v. FERC,955 F2d 67 (D.C. CiL 1992) 23

v

USCA Case #13·1229 Document #1468400 Filed: 1210212013 of 58

* United States v. L.A. Tucker Truck Lines, Inc.,344 US 33 (1952) 21, 39

Statutes:

The Postal Reorganization Act of 1970.Pub.L. No. 91-375, 84 Stat. 719 (1970) 5

Postal Accountability and Enhancement Act 0[2006,Pub. L. No. 109- 435,120 Stat. 3198 (2006):

39 US.C. §201................ . 539 US.c. § 403 1239 US.c. § 403(a) 539 US.c. § 403(c) 4, 6, 10, 11,24,26,3239 US.c. § 404(a)(I) 639 US.C. § 404(a)(2).................................... 639 US.c. § 50L 739 US.c. § 3601 (2000) 639 US.c. § 3622 (2000) 6, 7,41,4239 US.C. § 3622(a)...................17, 4139 US.C. § 3622(a)(9)......................... .. .4139 US.C. § 3622(b)...........................................42, 4339 US.c. § 3622(b)(5) 41,4339 US.c. § 3622(b)(8) 22,43,4639 US.c. § 3622(c).......................... . .40,4139 US.c. § 3622(c)(2) 1939 US.c. § 3622(c)(6) . .4339 US.c. § 3622(c)(7) . 4539 US.c. § 3622(c)(l4) . 4039 US.C. § 3622(d)..................... 1939 US.C. § 3623 (2000) 639 U.S.c. § 3624 (2000) 639 U.S.c. § 3633(3) 1739 US.c. § 3642 38, 4239 USC. § 3642(b)(I) 1739 US.C. § 3642(b)(2)...............17

VI

USCA Case #13·1229 Document #1468400 Filed: 1210212013 of 58

39 USC. § 3653..H...........H....4739 USC. § 3653(e) 4739 US.c. § 3662 4, 6,4539 US.c. § 3662(a) HHHHHHHHH' "'H"HHHHHHHH"H HHHHHHHHHH HH 1039 US.C. § 3662(c) H'HH" H.H.................HH.. . 1,7,2439 US.C. § 366LH H.. H.H.................HH.. . 2, 339 US.C. § 3663(c).H.H....HHH. . H 3

Rules:

Fed. R. Adm. P. 30(b)(l) H'H'" H...................HHHH 3939 C.FR 3010.II(k) 'HHHHHHHHHHH' HHHHHHHHHHH. "'HHHHHHHHHHHH "'HHH.45

Miscellaneous:

USPS Notice of Market-Dominant Price Adjustment, September 26, 2013,http://prc.gov/docs/87/8792llNotice%20(Price%20Adjustment).pdf 42

Vll

USCA Case #13-1229 Document #1468400

GLOSSARY

Commission

DVD

JA.

Postal Service

...Vlll

Filed: 1210212013 of 58

Postal RegulatoryCommission

Digital VersatileDisc

Joint Appendix

United States PostalService


IN THE UNITED STATES COURT OF APPEALSFOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 13-1229

UNITED STATES POSTAL SERVICE,

Petitioner,

v.

POSTAL REGULATORY COMMISSION,

Respondent,

and

GAMEFLY, INC.,

Intervenor.

BRIEF FOR RESPONDENT POSTAL REGULATORY COMMISSION

STATEMENT OF JURISDICTION

L This case arises out of intervenor GameFly's administrative complaint

that the Postal Service had unlawfully discriminated among users of the mail by

providing preferential treatment to other companies who use the mail to deliver

DVD's to their customers. The Commission had administrative jurisdiction under

39 U.s.c. § 3662(c).


2. On June 26, 2013, the Postal Regulatory Commission, on remand ordered

by the Court in GameFly, Inc. v. Postal Regulatory Comm'n ("GameFly F'), 704

F.3d 145 (D.C. Cir. 2013), directed the Postal Service to propose for the

Commission'5 consideration equalized rates for certain DVD mail as a remedy for

unlawful discrimination. Joint Appendix ("JA.") 268. The Postal Service filed a

petition for judicial review of that order on July 25, 20 13.

On the same date, the Postal Service filed with the Commission a motion for

administrative reconsideration and clarification, which the Commission granted in

part and denied in part on August 13,2013. JA. 315, 356. On August 22, 2013,

the Postal Service amended its prior petition for judicial review to include the

Commission's order on reconsideration and clarification.

On September 4, 2013, the Commission issued an order prescribing specific,

equalized rates for certain First-Class flat-shaped DVD mail and First-Class letter

shaped DVD mail. JA.368. On September 10,2013, the Postal Service amended

its prior petition for judicial review for a second time so as to include the

Commission's September 4 order.

3. The Postal Service's second amended petition is sufficient to vest this

Court with appeIlate jurisdiction under 39 V.S.c. § 3663. That statute provides

that a person, including the Postal Service, that is aggrieved or adversely affected

2


by an order or decision the Commission may appeal by petitioning this Court for

judicial review "within 30 days after such order or decision becomes final." Ibid.

The Commission's initial order of June 26 and its subsequent order of

August 22 each contemplated further administrative consideration of an

appropriate remedy and thus were not final. The Postal Service's initial petition

for judicial review and its first amended petition for review were consequently

premature. See Marcum v. Salazar, 694 F.3d 123 (D.C. Cir. 2012) (ongoing

agency review renders an agency order non-final and judicial review premature);

Bennett v. Spear, 520 U.S. 154, 177 (1997) (to be final, agency decision must mark

consummation of the agency's decision-making process and give rise to rights,

obligations, or legal consequences).

The Commission's September 4 order, however, resolves intervenor

GameFly's complaint of discrimination and is thus a final order amenable to

judicial review. The Postal Service's second amended petition is in substance a

timely request for judicial review of that final order. The Court therefore has

appellate jurisdiction under 39 U.S.c. § 3663(c).

STATEMENT OF THE ISSUE PRESENTED FOR REVIEW

Whether the Postal Regulatory Commission's remedial order complies with

the Court's remand in GameFly 1 and is based upon a reasonable exercise ofthe

Commission's statutory discretion under 39 U.S.C. § 3662(c) to "'take such action

3


as the Conunission considers appropriate" in determining a remedy for

unreasonable discrimination among users of the mails.

STATEMENT

A. Nature of the Case and Course of Proceedings Below.

Petitioner GameFly is a company engaged in the online rental of video

games. If distributes its rental games by mailing DVD's to customers, who then

return the DVD's to GameFly in pre-addressed reply mailers. In 2009, it filed a

complaint with the Commission under 39 U.S.C. § 3662, alleging that the Postal

Service had unlawfully discriminated against GameFly by according preferential

treatment to Netflix, another company that uses the mails to distribute rental

DVD's. lA. 1.

The Commission sustained GameFly's allegations. If found that the Postal

Service had failed to establish reasonable and legitimate reasons for providing

GameFly less favorable treatment than Netflix, and that the Postal Service had

unduly discriminated against GameFly, in violation of39 U.S.C. § 403(c). lA. 18.

The Commission ordered the Postal Service to make certain changes in the rates

and surcharges imposed on DVD mailers. lA. 135-36.

The Postal Service did not appeal the Commission's rmding of

discrimination. GameFly, however, appealed, contending that the remedies ordered

4


by the Commission did not adequately redress the Postal Service's discrimination

among users of the mail.

This Court reversed and remanded for further administrative proceedings. It

held that the Commission's remedial order was arbitrary and capricious because it

left discrimination in place without sufficient explanation. GameFly 1,704 F.3d at

149. It therefore vacated the Commission's prior order and remanded the matter

for further consideration. Ibid.

On remand, the Commission, after considering a variety of potential

remedies, issued an order directing the Postal Service to elect between two options

for equalizing the rates charged for letter-shaped and flat-shaped DVD mail. JA.

368. The Postal Service now appeals.

B. Statutory Background.

1. The Postal Reorganization Act of 1970.

In 1970, Congress abolished the old Post Office Department of the

Executive Branch and created in its place the United States Postal Service. Pub.

L. No. 91-375, 84 Stat. 719 (1970). The statute establishes the Postal Service as a

government-owned corporation, 39 U.S.c. § 201, and directs the Postal Service to

"plan, develop, promote, and provide adequate and efficient postal services at fair

and reasonable rates and fees." 39 U.S.c. § 403(a). To that end, the Postal Service

is specifically empowered "to provide for the collection, handling, transportation,

5


delivery, forwarding, returning, and holding of mail * * *," and "to prescribe, in

accordance with this title, the amount of postage and the manner in which it is to

be paid." 39 U.S.c. §§ 404(a)(I) & (2); see generally Nat. Ass'n a/Greeting Card

Publishers v. USPS, 462 U.S. 810 (1983).

Congress further decreed that the Postal Service may not unreasonably

discriminate among users of the mail. The statute thus provides that:

In providing services and in establishing classifications, rates, andfees under this title, the Postal Service shall not, except as specificallyauthorized in this title, make any undue or umeasonablediscrimination among users of the mails, nor shall it grant any undueor lUlreasonable preferences to any such user.

39 U.S.c. § 403(c).

The 1970 statute also established the Postal Rate Commission - the

forerunner of the respondent here, the Postal Regulatory Commission. The Rate

Commission was created as an independent establishment and directed to make

reconunendations to the Governors of the Postal Service with respect to rate, fee,

and mail classification matters. 39 U.S.c. §§ 3601, 3622, 3623, and 3624 (2000).

The Rate Commission was also vested with authority to review and make findings

on complaints of Postal Service discrimination. The 1970 statute, however, did not

authorize the Rate Commission to impose specific remedies. It instead provided

that if "the Conunission after hearing fmds the complaint to be justified, it shall

render a public report thereon to the Postal Service which shall take such action as

6


it deems appropriate." 84 Stat. 764 (1970), formerly codified at 39 V.s.C. § 3662

(2000).

2. The Postal Accountability and Enhancement Act of2006.

The Postal Accountability and Enhancement Act of2006, Pub. L. No. 109-

435, 120 Stat. 3198 (2006), established the Postal Regulatory COlrunission in lieu

of the Postal Rate COlrunission, see 39 V.S.c. § 501, and substantially revised the

Commission's powers to review and remedy complaints of discrimination. Under

the prior law, the predecessor Rate Commission was only authorized to issue a

report of its findings to the Postal Service. By contrast, the revised statute vests the

newly-established Regulatory Commission with broad discretion to order the

implementation of such remedies as the Commission deems appropriate. The

statute now provides that if the Commission finds a complaint of unreasonable

discrimination to be justified:

it shall order that the Postal Service take such action as theCommission considers appropriate in order to achieve compliancewith the applicable requirements and to remedy the effects of anynoncompliance (such as ordering unlawful rates to be adjusted tolawful levels, ordering the cancellation of market tests, ordering thePostal Service to discontinue providing loss-making products, orrequiring the Postal Service to make up for revenue shortfalls incompetitive products).

39 V.S.c. § 3662(c).

7


C. Statement of Facts: GameFly's Discrimination Complaint.

GameFly's complaint of discrimination centers on the Postal Service's

methods for processing round-trip DVD's sent through the mail. A movie or game

DVD is small enough to be sent as a one-ounce letter if enclosed in a lightweight

mailer. Letter-shaped mailpieces, however, are generally processed on automated

sorter equipment, which subjects the letters to a variety of physical stresses as they

are bent around the machine's rollers and forced through the machine's gates and

chutes at high speed. JA. 4-5. This automated processing can damage an enclosed

DVD and is particularly problematic on the return trip, when DVD's are mixed

with First-Class mail of varying shapes. GameFly and other businesses that rely on

distributing and collecting rental DVD's through the mail have accordingly sought

to have their return mail processed manually or through other procedures less

likely to damage their product.

GameFly alleged that the Postal Service has unreasonably discriminated

among DVD mailers in making manual letter processing available. It asserted, in

particular, that DVD's mailed as letters by two of the largest businesses in the field

- Netflix and Blockbuster - routinely receive special manual handling. On the

return trip, their DVD letters are frequently removed from the automated

processing stream. This manual processing, however, has been denied GameFly

and other, similarly situated DVD mailers. JA. 8-9, 22. GameFly further alleged

8


that, although an additional surcharge is ordinarily imposed on letters that are not

amenable to machine processing, the Postal Service had selectively refrained from

imposing the surcharge on Netflix. Ibid.

In the absence of a commitment from the Postal Service to process its

returning DVD's manually, GameFly took several alternative measures to ensure

that its DVD mail would avoid the automated, letter processing stream. First, it

mailed its DVD's in "flat-shaped" envelopes. JA.5. Flats are larger than

letter-shaped envelopes, and they are subject to higher postage rates as well. Like

letter-shaped mail, flats are processed automatically. But the machines for

processing flats subject the envelope to less severe physical stresses and are

therefore less apt to damage an enclosed DVD.

Second, GameFly inserted a cardboard protective insert in its DVD mailers.

JA. 5. The insert provides some additional cushioning against shock. More to the

point here, it helps ensure that the flat is not mistakenly routed to the automated

letter processing stream. The process for detennining whether to route mail to the

letter processing stream or flat processing stream is also automated. The selection

process, however, does not reliably distinguish between a letter-shaped envelope

and a relatively thin, flat-shaped envelope. Envelopes entered into the mail as thin

flats may therefore be inadvertently diverted to the automated letter processing

9


stream - even though the mailer has paid the additional postage applicable to flats

and employed a flat-shaped mailpiece. lA. 134-35.

This problem can be avoided if the mailpiece is made thicker, because flats

ofa certain thickness can be automatically culled with greater reliability and routed

through the flat processing stream rather than the letter processing stream. Ibid.

GameFly's cardboard inserts thicken its mailpieces and serve this purpose. The

inserts, however, also increase the weight of each mailpiece above one ounce.

And because postal rates are determined by weight in addition to shape,

the cardboard inserts necessary to ensure that the flats are properly routed through

the flat processing stream caused GameFly to incur still more, additional postage.

GameFly alleged that these circumstances amount to unreasonable

discrimination, in part because the Postal Service denies GameFly the same

manual processing accorded Netflix, and in part because the lack of manual

processing compels GameFly to use more expensive flat-shaped mail in order to

achieve the same result - avoidance of the automated letter stream and its attendant

risk ofdamaging DVD's during processing. lA. 12. GameFly accordingly filed a

complaint with the Conunission under 39 U.S.c. § 3662(a), alleging that the Postal

Service violated 39 U.S.c. § 403(c) by umeasonably discriminating among users

of the mail.

10


D. Prior Administrative and Judicial Decisions.

1. Commission's Initial Administrative Decision.

The Commission sustained GameFly's allegations and concluded that the

Postal Service had unduly discriminated against GameFly, in violation of 39

U.S.C. § 403(c). It found that GameFly and Netflix are similarly situated, and that

the Postal Service had afforded GameFly less favorable rates and terms and

conditions of service than Netflix. JA. 129. The Commission further found that

the Postal Service had failed to establish reasonable and legitimate reasons for

these differences in treatment. Ibid.

The Commission fashioned two complementary remedies for this

discrimination. First, the Commission directed the Postal Service to refrain from

imposing a non-machinable surcharge on any qualifying round-trip DVD mailer

that is sent as letter mail and that weighs one ounce or less. It thereby ordered

relief ending the Postal Service's selective enforcement of non-machinable

surcharge on DVD mailers and the preferential treatment ofNetflix with respect to

these charges. JA. 135.

Second, the Commission directed the Postal Service to offer a base rate for

mailing a two ounce, round-trip DVD flat that would be equal to the rate

previously imposed on a one ounce flat. JA. 134-35. In practical effect, this meant

that the extra weight GameFly or other DVD mailers must add to a flat mailpiece

11


in order to ensure that the flat is thicker and avoids the automatic letter processing

stream would not result in additional postal charges.

The Postal Service did not seek judicial review. GameFly, however,

appealed, contending that the Commission's remedial order did not adequately

redress the Postal Service's discrimination among users of the mail.

2. The Court's Prior Decision in GameFlv I.

The Court vacated the Commission's decision and remanded for further

consideration of an appropriate remedy. It reasoned that the Commission had left

discrimination in place by allowing the Postal Service to continue providing

manual processing to Netflix without extending the same opportunity to GameFly,

thereby forcing GameFly to employ a more costly form of mail to achieve

comparable protection from damage to its DVD's. GameFly I, 704 F.3d at 149. It

held that "ltJhe Commission must either remedy all discrimination or explain why

any residual discrimination is due or reasonable under [39 U.S.c.] § 403." Ibid.

The Court accordingly vacated the Commission's decision and remanded for

further consideration of an appropriate remedy. Ibid. The Court did not, however,

impose further limitations on the range ofremedies the Commission might

consider on remand. It instead stated that the Commission was not obligated to

adopt the remedies requested by GameFly, and that "there may be a range ofother

possible remedies which would withstand appellate review." Ibid.

12


E. Commission's Decision on Remand.

On remand, the Commission convened a settlement conference to consider

potential remedies. fA. 202-16. It identified six potential remedies for

consideration. fA. 214-16. Three of those remedies had been proposed by the

parties. fA. 214. Three additional potential remedies were identified by the

Commission. fA. 215-16. The parties were also invited to propose other possible

remedies. fA. 210, 212.

After the settlement conference proved to be unproductive the Commission

issued the remedial order challenged here. 11 specified several criteria that a

remedy must satisfY. First, it concluded that a remedy must provide GameFly

effective relief from discrimination by ensuring that GameFly would have

processing options that would afford it disc protection comparable to that afforded

Netflix, without requiring it to pay higher rates or incur other injury. fA. 282-83.

Second, it concluded that any remedy must be enforceable. The

Commission noted that the record demonstrated "the Postal Service's pattern of

intentional preferences favoring Netflix and its consistent refusal to provide

GameFly any credible assurances ofa comparable level" of treatment. fA. 284.

The Commission detennined that, in light of this record, any remedy selected must

be amenable to a means of ensuring that the Postal Service has implemented it.

Ibid.

13


Finally, the Commission concluded that the remedy must afford GameFly

timely relief. JA. 284. The Commission noted GameFly's assertions that

unremedied discrimination was costing the company $5.6 million per year (JA.

293) and reasoned that potential remedies must be ones that could be developed

and implemented expeditiously. JA. 292-93.

Applying these factors, the Commission imposed a remedy requiring the

Postal Service to equalize the prices charged for DVD letter mail and DVD flat

shaped mail weighing two ounces or less. It thus directed the Postal Service to

reduce the price for a two-ounce, First-Class, flat-shaped, round-trip DVD

mailpiece to the price of a First-Class, letter-shaped, round-trip DVD mailpiece.

Consequently, under the remedy imposed by the Commission, the Postal Service's

DVD customers may all purchase a First-Class, flat mail product that affords

protection from disc breakage comparable to that afforded by manually-processed

letter mail, for the same price as manually-processed letter mail.

The COnmllssion arrived at this decision after considering a variety of

potential remedies. One set of proposed remedies, which the parties have referred

to here as "operational" remedies, would have ordered the Postal Service to change

the manner in which it processes DVD's mailed as First-Class letters. These

proposals ranged from denying manual processing to all DVD mailers, including

14


Netflix, to affording comparable levels of manual processing to all DVD mailers.

JA.283-84.

The Commission concluded that these operational remedies would not result

in effective and reasonable redress for the Postal Service's discrimination among

DVD mailers. Some of the operational remedies, such as the Postal Service's

proposal to afford DVD mailers manual processing "to the extent possible and

practicable" did not, in the Commission's view, establish concrete standards that

would assure GameFly ofmanual processing at levels equal to that accorded

Netflix, especially in light of Postal Service comments "emphasiz[ing] the

likelihood that local variations in processing will lead to different degrees of

manual processing for different DVD mailers." JA.287.

Other potential operational remedies, such as that proposed by GameFly in

the initial administrative proceedings, contemplated manual processing at levels

that would satisfy a specific, objective performance standard applicable to all

round-trip DVD mailers. The Commission, however, concluded that there was no

reasonable means ofenforcing such objective standards. It reasoned in this regard

that the Postal Service had stated that it would be ",difficult, if not practically

impossible, or exceeding costly, to maintain an ongoing enforcement mechanism

that would ensure that every mailer's DVD letters will receive exactly the same

levels of manual processing * * *'''' JA. 290, quoting Postal Service letter of May

15


3,2013 (reprinted at lA. 223). It further noted that even if there were an effective

means of monitoring and enforcing compliance with objective perfonnance

standards, such measures would impose burdensome additional costs on the Postal

Service, other mailers, and the Commission itself lA. 291. The Commission

stated that it was "particularly reluctant to impose this burden on the Postal Service

when a more complete and efficient rate-based remedy exists." Ibid.

Finally, the Commission noted that GameFly and the Postal Service had

both asserted that any operational remedy would require reopening the record for

additional fact-fmding bearing on the feasibility of such remedies. lA. 292. It

concluded this would potentially harm GameFly by further delaying imposition of

an appropriate remedy. lA. 293.

The Commission held that, unlike these various operational remedies, a rate

based remedy would be effective, enforceable, and capable of implementation

without unreasonable delay. It reasoned that equalizing the rates paid for DVD

letter-shaped mail and DVD flat-shaped mail would redress the residual

discrimination found in GameFly I (JA. 294), that the remedy could be easily

enforced (JA. 301), and that new, equalized rates could be developed

expeditiously, without extensive additional fact-finding (JA. 302-03). The

Commission accordingly afforded the Postal Service an opportunity to propose

16


new, equalized rates for round-trip DVD mail and to submit documentation

supporting any such rate proposal. JA. 304, 307.

The Postal Service responded by proposing to create a new "competitive

product" for all round-trip DVD mail, which is currently market-dominant mail,

and to offer the competitive product at a newly-specified postal rate. JA. 328.

There are important distinctions between "market-dominant" products and

competitive products. Market-dominant products are: (I) those as to which the

Postal Service has a level of market power in providing that service that would

allow it to raise prices without losing «a significant level of business," or.,

(2) products that are reserved to the Postal Service by the statutory postal

monopoly. 39 U.S.c. § 3642(h)(I), or (2). Market dominant products are subject

to limitations on price increases, 39 U.S.c. § 3622(d), and more thoroughly

regulated than competitive products. See 39 U.S.c. § 3622(a)-(c).

All other products are considered competitive products. 39 U.S.c.

§ 3642(h)(1). As the name indicates, these are products or services as to which the

Postal Service faces direct competition, such as the expedited, direct delivery

service provided by Priority Mail. Competitive products must be priced at levels

sufficient to cover the costs specifically attributable to them and to make, in

addition, an appropriate contribution to the Postal Service's fixed, institutional

costs. 39 U.S.c. § 3633(a).

17


The Commission established separate administrative proceedings to develop

an appropriate factual record and evaluate the Postal Service's request to establish

a new, competitive product for DVD mail. lA. 335-36, 369. It concluded,

however, that, in light of the complexity of the issues presented by the competitive

product request, as well as the significant opposition expressed by multiple other

parties, the Postal Service's request could not be resolved promptly. lA.372. It

further concluded that it would be inappropriate to delay imposition of an

equalized rate remedy for GameFly's complaint of discrimination until final

resolution of the Postal Service's request to create a new, competitive product for

DVD mail. Ibid.

The Commission held that the appropriate solution is to prescribe without

further delay the rate level proposed by the Postal Service in the Service's

competitive product request as the appropriate «market-dominant" product rate for

DVD's mailed as either First-Class round-trip letters or First-Class round-trip flats

weighing two ounces or less.! lA. 372. As these rates would be equal for both the

letter mail employed by Netflix and the flat mail employed by GameFly, the

Commission reasoned that they would afford effective redress for the prior

discrimination among DVD customers. The Commission further reasoned that

these rate levels would not result in any material injury to the Postal Service

1 The specific rate for each leg of the round-trip is equal to the current rate for aFirst-Class letter: 46 cents.

18


because the rate would be set at the same level proposed by the Postal Service

itself in its request to establish a new competitive product for DVD mail. lA. 373.

The Commission accordingly ordered the Postal Service: (I) to set the rate

for mailing a two-ounce, First-Class flat-shaped, round-trip DVD at the same rate

as that applicable to a one-ounce First-Class, letter-shaped, round-trip DVD mail,

and (2) to provide for the rate to take effect on September 30, 2013. lA.376. It

further provided for additional proceedings to consider the Postal Service's request

to have DVD round-trip mail treated as a competitive product rather than a market-

dominant product. lA. 335-36, 373.

SUMMARY OF THE ARGUMENT

The Commission's remedial determination is consistent with the Court's

remand in GameFly I, adequately supported by the record, and well within its

broad statutory discretion to order such action as it considers appropriate to remedy

discrimination.

As an initial matter, the Postal Service errs in asserting that the Court's

mandate in GameFly I limits the Commission to remedies that adjust the terms and

conditions of processing DVD letter mail. The Conunission concluded that it

lacked the practical ability to ensure nondiscriminatory manual processing of all

DVD letter mail, and that the most efficacious remedy would therefore entail

19


equalizing the price ofDVD flat mail affording a comparable level of protection

from disc breakage.

Nothing in GameFly 1 suggests rhat such rate-based remedies are

impermissible. The Court there rejected a less complete rate-based remedy, not

because it concluded rate-based remedies were impermissible per se, but because

the Commission's prior remedy did not go far enough in ending discrimination. In

remanding to the Commission, the Court stated that a range of permissible

remedies could be sustained, provided they adequately redressed undue

discrimination. The Commission's latest order satisfies that condition and must be

affmned nuder the highly deferential review standards applicable to the

Commission'$ exercise of remedial discretion.

Moreover, the Commission had ample basis for rejecting various

"operational" remedies involving compulsory changes in the levels of manual

processing accorded other users of DVD letter mail. The Commission fonud that a

vague commitment to accord manual processing to the «extent practicable" would

not adequately redress discriminatory treatment of GameFly, particularly in light of

the Postal Service's record of unlawful preferential treatment and the Service's

candid acknowledgment that ensuring equal manual processing would be

"difficult, ifnot practically impossible, or exceedingly costly." JA. 291. The

Commission further found that, because actual levels ofmanual processing are a

20


function of a myriad of local conditions that are difficult to track and control,

specific perfonnance benchmarks for manual processing would be impractical and

unduly burdensome for the Commission, other mailers, and the Postal Service

itself. These reasons for rejecting various "operational" remedies are rational and

well supported by the record.

The Postal Service also errs in asserting that the Commission lacked an

adequate cost basis for prescribing a specific rate for DVD round-trip mail. The

Postal Service failed to respond to the Commission's request for a rate proposal

backed by adequate cost data and meeting the Commission's remedial

requirements. It must therefore be deemed to have waived any such cost-based

objection here. United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 37

(1952). In any event, in the proposal that the Postal Service did submit - one for a

new competitive product - the Postal Service represented that round-trip DVD mail

provided at the rate ultimately prescribed by the Commission would provide

sufficient revenue to meet the product's attributable costs without diminishing the

collective contribution ofcompetitive products to the Postal Service's institutional

costs. That, in conjunction with the imperative to remedy discrimination in the

treatment ofDVD mail, affords adequate cost justification for the Commission's

order.

21


The Postal Service further errs in asserting that the Commission failed to

give sufficient consideration to the various statutory criteria governing regulation

ofa market dominant product. GameFly 1 requires the Commission to give

precedence to remedying discrimination in the treannent ofDVD mail. While the

statute affords the Commission's broad discretion to consider a range of factors

and objectives when regulating market-dominant products, GameFly 1 holds that

these criteria cannot, on this record, justify continued unequal treatment absent

compelling explanation. The Commission did not act arbitrarily in hewing to the

letter and spirit of the Court's mandate by according precedence to enforcing the

statutory nondiscrimination requirement.

Finally, the prescribed rate remedy is well within the Commission's

authority to adjust rates where necessary to redress discrimination. Prior approval

of a rate does not preclude the Commission from subsequently adjusting it where

necessary to remedy discrimination. And contrary to the Postal Service's

contentions, the statute affords the Commission authority to create special rate

classifications for particular products as part of a remedy for prior discrimination.

See 39 U.S.c. § 3622(b)(8). The prescribed rate thus does not unlawfully

discriminate against other users of flat mail.

22


ARGUMENT

Filed: 1210212013 of 58

I. The Commission's Remedy Is Consistent With The Statute AsWell As The Court's Mandate in GameFly 1.

Congress has vested the Commission with broad authority to detenmine

appropriate remedies for discrimination among users of the mail. The

Commission's remedial discretion is not unlimited and may be set aside on judicial

review if the choice of remedies is illogical or inadequately explained. GameFly I,

704 F.3d at 148. Judicial review of an agency's choice of remedies must

nonetheless be accorded particularly deferential review and may not be overturned

unless '\mwarranted in law * * * or without justification in fact." Blitz v. Glover

Livestock Comm'n Co., Inc., 411 U.S. 182, 185-86 (1946); accord Towns of

Concord, Norwood, & Wellesley, Mass. v. FERC, 955 F2d 67, 76 (D.C. Cir. 1992).

The Postal Service asserts that the Commission has exceeded its broad

discretionary authority by imposing, as a remedy for discriminatory preferences in

manual processing of letter mail, an obligation to provide a service that affords

comparable protection from DVD breakage - First-Class, flat-shaped mail- at the

same price. The Commission concluded that it lacked the practical means of

ensuring that manual processing would be extended to all DVD mailers on a

nondiscriminatory basis, and that equalizing the cost of DVD letter mail and two-

Olillce flat-shaped mail would therefore be the most effective and expeditious

means of redressing the Postal Service's prior, preferential treatment ofNetflix.

23


The Postal Service nonetheless maintains that, because the underlying

fmding of discrimination entails discrimination in the provision of manual

processing services for First-Class mail, the only remedies open to the Commission

are those that entail some modification of manual letter processing. It thus

contends that the Court's mandate in GameFly I, by remanding for a remedy of the

Commission's finding of discrimination in the tenms of service afforded GameFly,

limits the Commission to "operational" remedies involving changes in the manual

processing of letter mail. USPS Br. at 36-38. And it further contends that, because

the underlying fmding of discrimination involves discrimination in the "terms of

service" applicable to manual processing of letter mail, the Commission is limited

to operational remedies. USPS Br. at 39-40.

Neither the statute nor the Court's mandate in GameFly I imposes such

limitations on the Commission's authority. The remedial provisions of the statute

are worded in the broadest of tenms, vesting the Commission with authority to

"take such action as the Commission considers appropriate in order to achieve

compliance" with the nondiscrimination requirement. 39 U.S.c.

§ 3662(c). This statutory authority extends, not merely to ordering changes in the

underlying discriminatory conduct, but to directing such action as is necessary "to

remedy the effects * * * " of such conduct" and to «ordering unlawful rates to be

adjusted to lawful levels." Ibid (emphasis added).

24


Moreover, the statutory nondiscrimination requirement proscribes only

"unreasonable" discrimination and «undue or unreasonable" preferences. 39 U.S.C.

§ 403(c). These qualifications leave the Commission with discretion to determine

that differences in processing do not rise to "unreasonable" or "undue"

discrimination if the Commission ensures that a comparable service is available at

the same price. That in tum confinns that the Commission has authority to remedy

discrimination in the provision of one service by adjusting the price of a

comparable service.

Here, the effect of the Postal Service's discrimination is to compel GameFly

to pay more than Netflix for a service affording protection from DVD breakage

comparable to that afforded by manual processing ofletter mail. The Commission

reasonably concluded that, because enforcing even-handed manual processing of

all DVD letter mail is impractical, the most effective means of redressing

discrimination would be to equalize the price differential between DVD letter mail

and DVD flat mail. Contrary to the Postal Service's assertions, that is well within

the Commission's statutory authority.

The Postal Service also errs in asserting that the Court's mandate in

GameFly I precludes the Commission from imposing a rate-based remedy

designed to ensure that GameFly pay no more than Netflix for comparable

protection from DVD breakage. USPS Br. at 34-38. As the Postal Service notes,

25


the decision of a federal appellate court estahlishes the law binding further action

by an agency on remand. The agency is thus "without power to do anything which

is contrary to either the letter or spirit of the mandate" of the reviewing court. City

ofCleveland v. Federal Power Comm 'n, 561 F.2d 344, 346 (D.C. Cir. 1977);

accord AT&T Wireless Serv., Inc. v. FCC, 365 F.3d 1095, 1099-1101 (D.C. Cir.

2004). The Court's remand order, however, does not preclude the Commission

from redressing the discriminatory preferences accorded Netflix by requiring the

Postal Service to charge GameFly the same price for services affording comparable

protection from DVD breakage.

That is clear from a brief review of the issues before the Court in GameFly 1.

The relief ordered in the Commission's initial decision did not include any

"operational" changes in the manual processing ofDVD letter mail. It instead

included a rate-based remedy directing the Postal Service to reduce the price

charged for First-Class, flat-shaped, DVD mail affording comparable protection

from DVD breakage. The rate reduction, however, did not equalize the price of

DVD flat mail and DVD letter mail. 11 thus left in place rates and practices that

effectively required GameFly to pay more than Netflix for comparable protection

from DVD breakage.

The Court found the continued price disparity unreasonable, concluding that

"lwJhere the Commission allows discrimination to exist in the postal rate

26


structure, it must explain why that discrimination is due or reasonable under [39

V.S.c.] § 403(c)." GameFly 1,704 F.3d at 148 (emphasis added). But although

the Court had before it a Commission remedy that responded to "terms of service"

discrimination by modifying the rates charged for a different service, it nowhere

suggested that the Commission was foreclosed from considering more complete,

rate-based relief on remand. Indeed, the Court invalidated the Commission's rate

based remedy, not because it deemed rate-based remedies impennissible per se,

but because it concluded the Commission's initial rate-based remedy did not go far

enough.

Nothing in GameFly I indicates that the only permissible means of

remedying discrimination in the provision of a particular service would be to direct

"operational" changes in that service. The Postal Service itself argued on remand

that the Commission had the option of better explaining its original remedy -- a

remedy that was confined to rate-based relief. See JA 186, 196. And the Court,

consistent with the Commission's broad statutory authority to fashion any

"appropriate" remedy, stressed that a range of possible remedies might withstand

appellate review. GameFly 1,704 F.3d at 149. The Postal Service thus errs in

asserting, contrary to its position below, that rate-based remedies are inconsistent

with the Court's remand order in GameFly 1.

27


II. The Commission Reasonably Rejected Operational Remedies.

The Commission opted for a rate-based remedy after concluding that

mandating appropriate changes in the Postal Service's manual processing ofDVD

letter mail would be ineffective, unenforceable, and apt to unreasonably delay

relief for discrimination that had persisted since at least 2009. Each of these

conclusions rests on determinations that must be accorded substantial deference on

judicial review. Forecasts about the practical impact of proposed remedial action

lie within a regulatory agency's specialized expertise and experience and must be

accorded due respect for that reason. Consumer Federation ofAmerica v.

Consumer Product Safety Comm'n, 990 F.2d 1298, 1300 (D.c. Crr. 1993).

Judgments as to the feasibility of undertaking various enforcement actions and

potential drain on the agency's enforcement resources are presumptively

committed by law to agency discretion. Heckler v. Chaney, 470 U.S. 821 (1985).

And the evaluation of whether an administrative remedy advances statutory policy

is ordinarily regarded as peculiarly a matter for administrative competence. Blitz,

411 U.S. at 185. As the Court has long held:

[T]he breadth of agency discretion is, if anything, at [its1zenith whenthe action assailed relates primarily not to the issue of ascertainingwhether conduct violates the statute, or regulations, but rather to thefashioning of policies, remedies and sanctions * * * in order to arriveat maximum effectuation of Congressional objectives.

Niagara Mohawk Power COip. v. FPC, 379 F.2d 153, 159 (D.C.Cir.1967).

28


The Commission's remedial discretion is not unbounded. But the Court has

cautioned that "it is not the role ofthe courts to second guess the [agency's]

judgment because we think we could devise a better solution than that which the

agency has adopted, so long as the agency's determination has a rational basis."

Columbia Gas Transmission Corp. v. FERC, 750 F.2d lOS, 109 (D.C. Cir. 1984).

The Commission's rejection of operational remedies in favor of a rate-based relief

satisfies this highly deferential standard ofreview.

A. The Commission Reasonably Determined That OperationalRemedies That Do Not Entail The Prescription Of Specific,Measurable Performance Standards For The Manual ProcessingOf DVD Mail Will Not Adequately Prevent ContinuedDiscrimination Among DVD Mailers.

The Commission rejected several proposed operational remedies on the

ground that they rested on vaguely phrased obligations to accord manual

processing "to the extent possible and practicable" and thus offered no assurance

that GameFly's letter mail would receive the same treatment as that accorded

Netflix's letter mail. JA.287. It noted that the Postal Service had itself

"emphasize[d] the likelihood that local variations in processing will lead to

different degrees of manual processing for different DVD mailers." JA. 287. The

Commission concluded that if it "'C3lll10t reasonably expect that its remedy will

provide GameFly and Netflix with equal degrees of manual processing, it has not

addressed the Court's concern with residual tenns of service discrimination." Ibid.

29


The Postal Service asserts that this determination is arbitrary because it:

(1) imposes an unsupported requirement to guarantee mailers protection from

DVD breakage (USPS Br. at 41), (2) unreasonably rejects remedies that would

afford "substantial parity" in levels of manual letter processing (id. at 42-43), and

(3) conflicts with the Commission's previously-announced policy of avoiding

unnecessary interference with the Postal Service's flexibility to determine how

mail should processed (id. at 42).

These objections are meritless. First, the Commission did not hold that a

remedy must provide specific guarantees against DVD breakage. It rather held that

a DVD mailer must have access to processing options that afford protection from

DVD breakage that is comparable to the protection afforded by processing options

made available to other mailers. The actual rate of damage is a function of both

the stresses created by different modes of mail processing and the physical

characteristics of an individual mailer's DVD and envelope. See USPS Br. at 44

n.l3. The Commission, however, only addressed itself to equalizing the risks

posed by the mail processing component of this equation. Contrary to the Postal

Service's assertions~ it did not require that a remedy equalize actual rates ofDVD

damage.

Second, the Commission was well within its discretion in concluding that

vague promises of substantial parity in manual processing would not afford

30


satisfactory relief from discrimination. The Commission found that "[tJhe existing

record demonstrates that the Postal Service viewed its past discriminatory

treatment of GameFly as approaching substantial parity with Netflix," and

concluded that a directive limited to that standard was apt to perpetuate unequal

treatment. JA. 287 (emphasis added).

The Commission's conclusion that, in the circumstances presented here, a

remedy must ensure equal treatment of similarly situated mailers, not mere

"substantial parity," is eminently reasonable. The record reflects an established

history of unlawful preferential treatment arising from both management

instructions and a multitude of local processing decisions that are difficult to track

and control. JA. 86-89. Moreover, the Commission noted that the Postal Service

had itself advised that differences in local decisions as to whether to process DVD

mail manually were still likely to result in different degrees of manual processing

for different DVD mailers. JA. 287. The Commission accordingly had a

reasonable basis for concluding that the amorphous "substantial parity" standard

urged by the Postal Service would allow these differences in treatment to persist,

that given the established history of affording Netflix improperly preferential

treatment, these differences were likely to devolve into continued, unreasonable

discrimination against GameFly, and that a more stringent remedial standard was

necessary to ensure that undue discrimination against GameFly would not recur.

31


That is well within the Connnission's remedial discretion and entitled to deference

on judicial review. 2

Even assuming, for purposes of argument, that a "substantial parity"

standard would be supported by the record and a reasonable construction of the

statute, the Court's mandate in GameFly I, would not appear to allow it. This

matter was remanded to the agency by the Court with instructions "either to

remedy all discrimination or to explain why any discrimination it left in place was

due or reasonable under § 403(c)." GameFly 1,704 F.3d at 148. The Court's

directive is unequivocal and would not appear to allow the Commission to tolerate

disparities in treatment absent a compelling reason to do so. As the Connnission

reasoned (JA. 287), there is considerable doubt as to whether, on this record, a

remedy requiring only "substantial parity" in manual processing would be

consistent with the Court's order.

2 Cf Stilwell v. Office ofThrift Supervision, 569 F.3d 514, 519 (D.C Cir. 2009)("agencies can, of course, adopt prophylactic rules to prevent potential problemsbefore they arise. An agency need not suffer the flood before building the levee");see also Air Transpart Ass'n ofAmerica, Inc. v. US Dept. ofTransportation, 613F.3d 206, 213-14 (D.C Cir. 2010) (under Chevron deference principles, reviewingCourt must defer to any pennissible agency interpretation of statute barringairports from imposing "unjustly discriminatory" airport fees); Illinois PublicAss'n v. FCC, 117 F.3d 555, 567-68 (D.C Cir. 1997) (court must defer to FCC'sinterpretation of the nondiscrimination provisions of the Telecommunications Act);Associated Gas Distributors v. FERC, 824 F.2d 981,1001 (D.C. Cir. 1987) (courtmust defer to FERC determination of what constitutes undue discrimination underthe Natural Gas Act).

32


Finally, as the Commission's rate-based remedy does not direct any

operational changes in how mail is handled, there is no basis for the Postal

Service's contention that the remedy conflicts with the Commission's previously

announced policy of preserving the Postal Service's operational flexibility.

For all these reasons, the Commission acted reasonably in concluding that

operational remedies that did not mandate specific performance standards would

not adequately redress discrimination.

B. The Commission Reasonably Determined That OperationalRemedies Mandating Specific Levels Of Manual ProcessingWere Unenforceable And Apt To Unreasonably DelayRelief.

Operational remedies requiring the Postal Service to afford all DVD mailers

a specific and equal level of manual processing would, in theory, guarantee equal,

nondiscriminatory treatment. The Commission, however, rejected these remedies

after concluding that they would be difficult to enforce in practice, and that they

could not in any event be implemented without unreasonable delay. The

Commission thus found that "[iJt would be extremely difficult for the Commission

and the Postal Service to carry out the kind of day-to-day, nationwide monitoring

of the Postal Service's extensive operational network that would allow the

Commission to detennine whether GameFly was receiving the same treatment as

other DVD mailers." JA. 289. It found that even if such monitoring were

feasible, it would likely result in the imposition of potentially large and undesirable

33


costs on the Postal Service, mailers, and the Commission itself. JA 291. And it

further fonnd that all parties had agreed that the development of remedies

including such monitoring and enforcement measures would necessitate reopening

the record for additional factual development (lA. 292-93), thereby further

delaying redress for GameFly and prolonging uncertainty among other DVD

mailers. JA. 293.

The Postal Service's objections to the Commission's reasoning are

unfounded. First, it errs in asserting that the Commission's decision is arbitrary

because the Commission failed to explain why issues of enforceability and

timeliness matter. USPS Br. at 45. These considerations are plainly directed at

ensuring that any remedy will afford meaningful relief in practice and their

significance is explicit in the Commission's analysis. JA. 282-86. Even in

situations where the agency's reasoning is neither express nor self-evident, the

reviewing court may "uphold a decision of less than ideal clarity if the agency's

path may reasonably be discerned." Bowman Transp. Inc. v. Arkansas-Best

Freight System, 419 U.S. 281, 286 (1974). Here, the Commission's intent to

ensure meaningful, workable remedies pervades its analysis and opinion.

Considerations of enforceability and timeliness are patently related to those

objectives. That the Commission did not elaborate on the obvious does not render

its decision arbitrary or capricious.

34


Second, the Postal Service also errs in asserting the Commission's findings

are untenable because there are administrative and judicial procedures for

resolving complaints of discrimination, along with authority to fine or enjoin

unlawful conduct. USPS Br. at 45-47. GameFly's right to file a subsequent

administrative complaint does not give the Commission any greater ability to

determine the levels of manual processing accorded DVD mailers. And the

general authority to impose fmes or injunctive relief does not give the Commission

any greater ability to prescribe rules that would, in practice, ensure equality of

manual processing - an outcome the Postal Service has itself described as

"difficult, if not practically impossible, or exceedingly costly" to attain. JA. 291.

Third, contrary to the Postal Service's contentions, data from scanning the

bar codes affixed to DVD mail will not solve the many practical difficulties of

enforcing a mandate to accord DVD mailers equality in manual processing. Even

assuming bar code scans would permit a reliable determination of the rate of

manual processing, they would shed no light on important qualitative differences

in manual processing. Manual processing, for example, might include sorting,

stacking, or other special processing steps. See JA. 237. Bar code data would not

afford any means ofdetermining whether the Postal Service had continued to

discriminate among users of the mail by extending these special manual processing

procedures to one DVD mailer but not another. Moreover, continual compliance

35


monitoring would impose costs on the Commission as well, overtaxing its limited

resources and casting it in an unwelcome, supervisory role over day-ta-day postal

operations. See lA. 289-90; see also lA. 132. All these factors support the

Commission'$ detennination that an operational remedy is impracticable.

Finally, the Commission reasonably concluded that the additional record

development necessary to devise an appropriate operational remedy would

unreasonably delay relieffor GameFly. The Postal Service acknowledged below

that any such remedy would require reopening of the record. lA. 292-93. It argues

here that the attendant delay in issuing a final remedy is of no moment. USPS Br.

at 48. But the Commission noted GameFly's uncontradicted assertion that

continued delay in prescrihing relief was costing the company approximately

$470,000 per month. lA.293. The Commission could reasonably take that into

account when structuring a remedy.

The Postal Service argues that despite the harm caused by delay, further

fact-fmding is not precluded and immediate relief is not required. USPS Br. at 48.

That is true but irrelevant. The statute affords the Commission broad authority to

detennine how best to vindicate the purposes of the statute. The nondiscrimination

provisions are intended, among other objectives, to protect mailers from economic

hann caused by preferential treatment of other mailers. It is thus entirely rational

for the Commission to take into account the harm that would befall the

36


complainant if a remedy is umeasonably delayed by further administrative

proceedings, especially where more expeditious remedies are available.

III. The Commission's Rate-Based Remedy Is Reasonable.

Rather than prescribe changes in manual processing ofDVD letter mail, the

Conunission elected to equalize the rates charged for round-trip DVD flat and

letter mail. lA. 300-303. The Postal Service argues that the resulting rates are

arbitrary and capricious because they: (I) are unsupported by adequate cost and

pricing infonmation, (2) have been imposed without consideration of the statutory

factors and objectives governing the Commission's regulation of market-dominant

products, and (3) impenmissibly discriminate against other customers using flat

mail by establishing special, reduced rates for DVD mail. See USPS Br. at 50-56.

Each of these contentions is incorrect.

A. The Postal Service Waived Its Objections To The Adequacy ofSupporting Price and Cost Infonmation, And The Record, InAny Event, Supports The Commission's Detenmination.

After deciding that it would impose a rate-based remedy, the Commission

directed the Postal Service to propose equalized rates for round-trip DVD mail and

to provide appropriate, supporting documentation. lA. 303-04. It thus instructed

the Postal Service to submit an equalized rate proposal within 30 days, along with

documentation consisting of a general description of the rates and how they

comply with the Court's opinion in GameFly I, the rate schedule and appropriate

37


modifications of the Mail Classification Schedule and Domestic Mail Manual, and

price cap calculations or an explanation as to why such calculations are

unnecessary. lA. 304-05, 307.

The Commission did not require that the rates equal the rates for First-Class

letters. It instead left the Postal Service free to propose equalized rates that would

be higher than the current rate for First-Class letter mail, and that would take

appropriate account of the cost characteristics of flat mail. It further ordered,

however, that if the Postal Service elected not to propose new equalized rates, the

Postal Service would be required to reduce the price for a two ounce, flat-shaped,

roundtrip DVD to the then current price of a one-ounce First-Class letter-shaped

DVD. lA.307.

In response, the Postal Service submitted a request to have round-trip DVD

treated as a competitive product rather than a market dominant product. lA. 327.

It did not make any proposal with respect to the appropriate rate for a market

dominant product complying with the Commission's remedial order. Nor did it

argue that the proposed, competitive product should be priced at a rate higher than

the then current rate for a First-Class letter. It instead proposed a single rate equal

to the rate for First-Class letter mail. See Request of the USPS Under Section 3642

38


to Create Round-Trip Mailer Product, Attachment A at p.l. 3 The Postal Service

expressly represented that, at the proposed rate, the new product would cover its

attributable costs and be unlikely to diminish the collective contribution made by

all competitive products to the Postal Service's institutional costs. /d. at 2-3.

The Conunission, again citing the need for an expeditious remedy, accepted the

rates in the Postal Service's competitive product proposal as the rates appropriate

for market-dominant DVD mail and scheduled further proceedings on whether to

add round-trip DVD mail to the competitive product list. lA.373-74.

The Postal Service stresses that letters and flats are separate products with

separate cost characteristics. It asserts, in particular, that the prescribed rates are

unreasonable because they do not comply with statutory provisions requiring these

differences to be taken into account when regulating the price ofmarket dominant

products. USPS Br. at 51-52. It has waived this contention, however, by failing to

make any argument below with respect to the appropriate price of a market-

dominant DVD product complying with the Commission's remedial order.

3 We did not designate for inclusion in the joint appendix the attachments to thePostal Service's request to add DVD round-trip mail to the competitive productslist. The attachments are nonetheless part of the administrative record and maythus be considered by the Court. See FRAP 30(b)(I). The attachments areavailable at<http://www.pre. gov/Docs/87187436/3642%20Reguest%20(Final).pdf>.

39


A party challenging an administrative decision must raise its objections in

the administrative process in order to preserve them for judicial review. United

Slales v. L.A. Tllcker Truck Lines, Inc., 344 U.S. 33, 37 (1952). Here, the

Commission afforded the Postal Service an opportunity to propose an appropriate

price for a market-dominant product meeting the requirements of the

Commission's remedial order. The Postal Service was thus free to propose a rate

that: (I) recognized the new product required by the Commission's remedial order

would include First-Class, flat-shaped mail and, (2) took adequate account of the

unique cost and pricing characteristics associated with flat mail. The Postal

Service instead elected not to propose any market-dominant price at all.

"Simple fairness to those who are engaged in the tasks of administration, and

to litigants, requires as a general rule that courts should not topple over

administrative decisions unless the administrative body not only has erred but has

erred against objection made at the time appropriate under its practice." L.A.

Tllcker Trllck, 344 U.S. at 37. The Postal Service must consequently be deemed to

have waived its cost objections.

In any event, the rates prescribed by the Commission are consistent with the

statute and adequately supported by the record. The statute provides that in

regulating market-dominant products, the Commission must take account of a

range of objectives and factors. 39 U.S.C. § 3622(b) & (c). The statute also

40


requires the Commission to rectify undue discrimination among users of the mail

(39 U.S.c. §§ 403, 3622(c)) and to take account ofthis sfatutory policy against

discrimination when regulating market-dominant products. See 39 U.S.c. §

3622(c)(14)). No single factor or objective controls. Rather, each statutory

objective governing market-dominant products instead "shall be applied in

conjunction with the others * * *" 39 U.S.c. 3622(b). The Commission may

thus determine that, on balance, the need for an adequate remedy for

discrimination takes precedence over the other criteria governing regulation of

market-dominant products. Consequently, arguments that a discrimination remedy

is inconsistent with some of the objectives or factors governing regulation of

market-dominant products do not, standing alone, establish that the remedy

exceeds the Commission's statutory authority.

Even apart from that consideration, the Postal Service has failed to

demonstrate how the rate prescribed by the Commission fails to meet one of the

cost-related objectives or factors set forth in 39 U.S.C. § 3622 (b) & (c). Several

of the objectives and factors specified in section 3622 pertain expressly to rates.

The Commission must thus consider whether a rate appropriately allocates the

Postal Service's institutional costs between market-dominant and completive

products (§ 3622(a)(9)), whether the product bears its attributable costs

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(§ 3622(c)(2)), and whether it will generate revenue that will assist the Postal

Service in maintaining its financial stability (§ 3622(b)(5)).

Here, the Postal Service's submission asserts that the rate it proposed for a

competitive product - the same rate ultimately accepted by the Commission for a

market-dominant product - meets these criteria. In particular, it advised the

Commission that the prescribed, single rate for DVD flat and letter mail would

meet the costs attributable to the new product and preserve the collective

contribution of competitive products to the Postal Service's institutional costs.

Request of the USPS Under Section 3642 to Create Round-trip Mailer Product,

Attachment A at pp. 2-3.

The Postal Service offers no explanation as to how a rate covering a

product's attributable costs would nonetheless be inconsistent with the section

3622 objectives and factors governing regulation of market dominant products.

Indeed, in a recent, post-decision submission to the Commission seeking price

increases for market-dominant products, the Postal Service represented that the

current rate structure, including the special rates for DVD round-trip mail ordered

in this proceeding, is consistent with the objectives and factors set forth in 39

U.S.c. § 3622. See USPS Notice of Market-Dominant Price Adjustment,

September 26, 2013, at pp. 2,11, available at

<http://prc.gov/docs/87/8 792I/Notice%20(Price%20Adjustment).pdf>.

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The Postal Service's own submissions thus support the Commission's rate

detennination.

B. The Commission Reasonably Determined That Its Mandate ToRemedy Discrimination Takes Precedence Over Other CriteriaGoverning Regulation of Market-Dominant Products.

The Postal Service further asserts that the Commission erred by failing to

take account of other objectives and factors governing regulation of market

dominant products. It notes that section 3622 directs the Commission to consider

such matters as the Postal Service need for pricing flexibility, adequate revenue,

and whether postal rates are "just and reasonable" in regulating market-dominant

products. And it concludes that the Commission erred by prescribing a rate for

DVD mail without evaluating these statutory objectives and factors. USPS Br. at

53-54.

The Commission, however, correctly concluded that in light of GameFly I,

these statutory factors could not justify a continued disparity between the rate for

DVD letter mail and the rate for DVD flat mail. See JA. 299-301. In GameFly I,

the Commission concluded that operational changes to ensure nondiscriminatory

manual processing ofDVD letter mail would be infeasible. Thus, the only

practicable option was to adjust the rate charged for flat mail affording comparable

protection from DVD breakage. The Commission did not, however, equalize the

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rates charged DVD letter mail and DVD flat mail. It instead allowed the Postal

Service to continue to charge a higher rate for DVD flat mail than letter mail.

In GameFly 1, the Commission, citing many of the same statutory provisions

cited by the Postal Service here, reasoned that other statutory factors and objectives

governing regulation of market-dominant products justified this continued pricing

disparity. Thus, in defending its initial remedial choice in GameFly 1, the

Commission argued that:

The Commission's mandate upon finding discrimination is to adoptsuch remedies as it deems "appropriate." In making thatdetermination, the Commission is free to consider the impact of aproposed remedy on other statutory interests. Those interests includeassuring revenues sufficient to maintain the Postal Service's [maneialstability (id. § 3622(b)(5)), preserving the Postal Service's authority todraw reasonable distinctions "within, between, or among classes ofmail" (Id. § 3622(b)(8)), preserving the simplicity of the rate structure(39 U.S.c. § 3622(c)(6)), and maintaining the Postal Service's pricingflexibility (id. § 3622(c)(7)). Thus, the Commission is not obligated toimpose, as a remedy for disparate treatment among DVD mailers, new ratesthat would blur the distinction between letter mail and flat mail.

GameFly 1, Conunission Br. at 48-49.

GameFly 1 rejected this reasoning. It instead held that if the Postal Service

forces a mailer to use flat mail by selectively denying it manual processing of letter

mail, it cannot rely upon the special characteristics of flat mail as basis for

charging a higher price. 1d., 704 F.3d at 148-49. On remand, the Commission

consequently concluded that it could no longer rely on its statutory authority to

take account of the special characteristics of flat mail as a basis for a continued

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disparity in price. lA. 300. It instead held that the imperative to afford a complete

remedy for undue discrimination, in conjunction with the lack of a viable

operational remedy, compelled it to equalize the rates for DVD flat mail and letter

mail, notwithstanding other statutory provisions governing market-dominant

products. Ibid.

The Postal Service disputes this interpretation of the Court's opinion by

reiterating its contention that the Court mandated operational remedies addressed

to changes in the manual processing of letter mail and thus did not permit

consideration of rate-based relief in the fIrst instance. USPS Br. at 53. But as we

have shown above, that is simply not so. The GameFly I panel had before it a rate-

based remedy. It reversed, not because it deemed rate-based remedies

inappropriate per se, but because the Commission's prior rate remedy did not go

far enough, and because it found the Commission's explanation for the continued

rate disparity inadequate. GameFly 1,704 F.3d at 148-49. Contrary to the Postal

Service's position, the Court's mandate required the Commission to give

precedence to the need for a full remedy, notwithstanding the criteria that would

otherwise be considered in establishing market dominant prices.

C. The Prescribed Rate Adjustments Are Consistent With TheStatute And Nondiscriminatory.

The Postal Service [mally argues that the prescribed rate must be set aside

because it impermissibly modifIes a presumptively lawful rate for flat mail, and

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because it is itself discriminatory with respect to other flat mail customers. USPS

Br. at 52-56. Both contentions are unavailing.

The Postal Service initially errs in asserting that the prior rate for DVD flat

mail was approved in the annual compliance review process established by 39

u.s.c. § 3653 and is therefore presumptively lawful. The prior flat mail rate - the

rate modified in the Commission order at issue here - was proposed and took

effect in January 2013. That rate, however, has not yet been subject to a section

3653 compliance determination. The 2013 rate has instead only been subject to the

Commission's provisional approval and is expressly subject to further review. See

39 C.F.R. 3010.ll(k). Further review may occur in the Annual Compliance

Determination referenced by the Postal Service, but that has not yet occurred and is

not scheduled to begin until December 2013. See 39 US.C. § 3652(a) (providing

that Postal Service must submit annual compliance reports within 90 days afler

close of pertinent fiscal year); 39 U.S.c. § 3653(b) (providing that Commission

must make compliance detennination within 90 days of receiving required cost

reports). The premise of the Postal Service's argument - that the Commission

order modifies a rate that has been approved in a section 3653 compliance

determination - is thus incorrect.

Moreover, the Postal Service misstates the Commission's authority to adjust

previously approved rates. The compliance review statute on which the Postal

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Service relies makes clear that a prior finding of compliance establishes only a

rebuttable presumption of compliance in a section 3662 proceeding to remedy

complaints of discrimination. See 39 U.S.C. § 3653(e). A prior section 3653

determination that a rate complies with the statute thus does not constrain the

Commission's authority to make subsequent rate adjustments where necessary to

remedy discrimination.

Finally, the Postal Service errs in asserting the prescribed rate unduly

discriminates against non-DVD users of flat mail, who must now pay a higher

price for the same service. The Commission has statutory authority to establish

special classifications and services of mail as part ofa system for regulating

market-dominant products. 39 U.s.c. § 3622(b)(8). Its fmding of discrimination

and conclusion that it would be infeasible to order changes in the manual

processing of DVD mail support establishment of a special niche product for

round-trip DVD mail. Section 3622(b)(8) makes plain that such special

classifications are penmissible and not unduly discriminatory.

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CONCLUSION

Filed: 1210212013 of 58

The Commission's decision should be affirmed.

Respectfully submitted,

OfCounse!:

STEPHEN L. SHARFMANGeneral Counsel

R. BRIAN CORCORANDeputy General Counsel

RICHARD A. OLIVERALLISON J.W. McDONALD

AttorneysPostal Regulatory CommissionWashington, DC 20268

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STUART F. DELERYAssistant Attorney General

MICHAEL S. RAAB(202) 514-4053

/s/ JEFFREY CLAIR(202) [email protected]

Attorneys, Civil DivisionRoom 7243, Department ofJustice950 Pennsylvania Ave., N. W.Washington. D.C. 20530


FRAP 32(3)(7) CERTIFICATE OF COMPLIANCE

I certifY that this brief has been prepared using a 14-point, proportionally

spaced font and that, based on word processing software, this brief contains 10,437

words.


CERTIFICATE OF SERVICE

I certifY that on December 2, 2013, I served the foregoing Brief for the

Respondent by electronically filing the brief with the Court. As counsel for the

petitioner and intervenor are registered with the Court's Electronic Case Filing

System, the electronic filing of the Brief for Respondent constitutes service upon

them.


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BRIEF FOR RESPONDENT REGULATORY COMMISSION

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